When you are negotiating the price of your car or truck, the salesman may, at some point, suggest that you lease your new vehicle. More and more customers are leasing these days, largely because the salesman can make it sound so attractive. So let's take a closer look at what leasing is really all about.
In a lease, the dealership sells the car to a bank or finance company. Then, you rent that car from that bank for a specified period of time, usually two or three years. At the end of the lease, you have a choice: you can either return the vehicle to the bank and, after (possibly) paying certain fees, walk away clean -- or you can buy the vehicle outright and own it. The salesman will tell you that the advantage to leasing is that your monthly payments will be much lower than if you bought the car, your down payment will be much lower, and best of all, you can drive a brand-new car every few years.
The truth is that leasing can be a tricky affair and oftens turns out to be a lot less wonderful than you're led to believe. That's because:
Negotiating a lease can be very difficult.
As you are negotiating your lease, the dealership's Sales Manager - using his computer and leasing software - can fiddle with your monthly payments, "drive-off" fees, end-of-the-lease fees, money factor (lease interest rate) and other details to extract as much money from you as possible. And to really know if you're getting a good lease deal, you need your own leasing software to check out the figures for yourself.
There are several other traps to leasing, too:
1. There may be a penalty for excessive mileage. You may be charged for every mile you drive over a pre-set limit, usually 12,000 to 15,000 miles per year. If you drive a lot, that can get very expensive.
The bottom line is that the salesman loves to push leases because they're such a good deal for the dealership, which means they're probably not such a good deal for you.
2. You need good credit to lease. It's not always that easy to qualify.
3. You are required to maintain the car as if you owned it. You must pay for oil changes, tune-ups, brakes, tires, hoses and other repairs for a car that you do not own.
4. The lease payments they quote you may not include sales tax. If not, then the sales tax will be added to each monthly payment. The result is that your actual payments will be a bit higher than what they told you.
5. There may be a hefty return fee at the end of the lease. It can cost you hundreds, even thousands, of dollars just to return the car back to the bank at the termination of the lease.
6. You will have to get extensive auto insurance. The bank may require you to purchase auto insurance coverage with much higher limits than you would need if you bought the car. That can get expensive.
7. Leases are difficult to terminate early. The salesman is rarely straight with you about this. He may tell you that it is very easy to end the lease early if you care to. In reality, it can be very expensive to terminate a lease before it has expired. As a matter of fact, there are lots of customers driving leased cars that they don't want but can't afford to return to the bank. (The most frequently asked question on this website is: "How can I get out of my lease?")
8. Your lease payments may not be that much lower than if you bought the car. The savings may not be as great as the salesman will lead you to believe. This is particularly true on a four or five year lease.
Leasing can, however, be a smart thing to do under two very specific circumstances:
1. You know you will be keeping your new vehicle for only two or three years. If so, leasing can be a way to do this without tying up lots of your cash.
If neither of these situations applies to you, then you should probably avoid leasing.
2. Your accountant advises you to lease. He'll be able to tell you if leasing makes economic sense for your particular situation and if you're eligible to receive certain tax deductions and other benefits for leasing.
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